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Chapter 7, 11, and 13: Different Types of Bankruptcy Explained
When you fall behind on debt payments, the lender’s collection efforts can lead to unrelenting calls and you feeling like you’re in over your head. To determine the best route for managing the situation, the debtor should understand all options for resolving charges, including chapter 7, 11 and 13 bankruptcies.
Chapter 7 Bankruptcy
In a chapter 7 bankruptcy, individuals are assisted in liquidating and selling their non-exempt assets in order to pay off creditors with the proceeds. There are no future obligations on court-relieved debt, and most unsecured debt is legally discharged. Exempt assets and debts, not included in the bankruptcy, are:
- Student loans
- Most taxes
- Child support
- Liens securing property
- Reaffirmed debt
Chapter 11 Bankruptcy
A chapter 11 bankruptcy is primarily for large businesses, deep in debt, and leads to financial reorganization. The debtor continues to operate under court supervision. This type of bankruptcy is flexible because the debtor and the creditors can agree to any plan they find suitable. All debts are eligible for negotiation.
Chapter 13 Bankruptcy
A chapter 13 bankruptcy is a court-enforced repayment plan available to a husband and wife, filing jointly, or to individuals. The court approves a payment plan, and payments are made through an appointed trustee. Creditors don’t have to agree to the repayment plan, and you retain assets as long as payments are made as agreed. The repayment schedule is intended to last anywhere from 3 to 5 years, and debtors must have a consistent source of income.
A percentage of unsecured debt may have to be repaid, and the remaining balance will be wiped out once the repayment plan is completed. For example, the most common approach is the “60/60 plan”, where if you pay 60% of your debt within 60 months, the remaining 40% will be eliminated.
Usually, the full amount of an unsecured debt is discharged, meaning you wouldn’t owe anything to the creditor once the payment plan for other debt is completed.
Decision with Consequences
Although a bankruptcy filing stops credit collection, it affects your credit score and makes it difficult to get new loans in the future. If you’re able to get new credit, it can come with high interest rates and many stipulations. The impact of bankruptcy can follow a debtor for quite some time. A chapter 7 bankruptcy remains on your credit report for 10 years, and a chapter 13 bankruptcy for seven.
All forms of bankruptcy should be considered as a last resort to alleviate debt. The right decision can often be made by utilizing credit counseling. This option can save thousands of dollars in interest, stop calls from credit collectors and relieve feelings of anxiety.
Call our counselors at 1-800-500-6489 to decide if our non-profit credit solutions could benefit you.